People ex rel. Dowling v. Aambg Reinsurance, Inc.

United States District Court, N.D. Illinois, Eastern Division

June 1, 2017

PEOPLE OF THE STATE OF ILLINOIS, ex rel., ANNE MELISSA DOWLING, ACTING DIRECTOR OF INSURANCE OF THE STATE OF ILLINOIS, as Rehabilitator for TRIAD GUARANTY INSURANCE CORPORATION and TRIAD GUARANTY ASSURANCE CORPORATION, Plaintiff,v.AAMBG REINSURANCE, INC., and BANK OF AMERICA CORPORATION, Defendants.

MEMORANDUM OPINION AND ORDER I.
BACKGROUND

Harry
D. Leinenweber, Judge

Normally
a home purchaser is required to pay 20% of the purchase price
as a down payment in order to compensate for the risk of
default. In order to increase the supply of home purchasers,
lenders started to allow under-qualified home purchasers
(those who could not make the 20% down payment) to borrow
more than the 80% if they purchased Private Mortgage
Insurance (“PMI”) to compensate the lender in
case the borrower defaults. In order to protect themselves
from losses due to defaults, insurance providers of PMI would
purchase reinsurance in order to shift some of the risk of
default. The PMI provider would pass on the reinsurance
premium to the borrower in the form of a higher premium for
the PMI. The PMI provider would split the premium with the
reinsurer, which is called a “ceding payment, ”
in accordance with the risk assumed. Some lenders, which is
apparently the case here, have found it economical to have
“captive” reinsurers, i.e., reinsurers
that are owned or controlled by the lender. Apparently, this
enables the lender to figure its risk based more closely on
its own loss experience rather than on the experience of the
industry as a whole. Thus, the captive reinsurer does not
reinsure the loans of any lender other than those it
specifically lists in its agreement with the PMI provider.

This
case arises because a PMI provider, Plaintiffs in this case,
Triad Guaranty Insurance Corporation and Triad Guaranty
Assurance Corporation (hereinafter, collectively,
“Triad”), was placed in rehabilitation on
December 12, 2012. The Plaintiff Anne Melissa Dowling, acting
Director of Insurance for the State of Illinois (since
replaced by Jennifer Hammer, Director of Insurance), was
appointed the Rehabilitator on that date.

In
2016, this suit was filed by the Rehabilitator on behalf of
Triad against AAMBG Reinsurance, Inc. (“AAMBG”),
and Bank of America Corporation (“BOA”). As the
name suggests, AAMBG had provided reinsurance to Triad for
mortgage loans insured by Triad on behalf of certain lenders,
referred to as “approved originators, ” pursuant
to a written agreement (Exhibit B to the Amended Complaint).
Under the agreement, AAMBG was obligated to pay Triad a
portion of all cumulative net losses suffered by Triad during
a given policy year. The losses were to be divided as
follows: Triad was to pay the first 4% of cumulative Net
Losses that occurred during the policy year, AAMBG was to pay
the next 10% of cumulative Net losses, and Triad was to be
liable for cumulative net losses that were 14% or more. In
other words, AAMBG had a 10% reinsurance band between net
losses of 4% and 14%. Triad suffered the first 4% of net
losses and all losses that exceeded 14%. While AAMBG was
obligated to reinsure Triad for all loans that originated
from the approved originators, Triad could reject any loan
from the approved originators and decline to issue PMI to the
proposed borrower.

In
Count I of the First Amended Complaint, Plaintiffs allege
that AAMBG warranted and represented in its agreement with
Triad that the approved originators would disclose “the
dividends and the benefits it derived from the mortgage
reinsurance premiums to the borrowers whose loans were
subject to the agreement, ” which the approved
originators did not do, and as a result Triad suffered
damages. Count II of the Complaint alleges that AAMBG and the
approved originators violated the duty of good faith and fair
dealing implied in the contract by “vetting” the
borrowers to be referred to Triad for PMI so as only to refer
those having the highest level of default risk. This,
according to the Complaint, allowed AAMBG and the approved
originators “to minimize their risk of reinsuring loans
that could go into default, while maximizing profits for
AAMBG and its affiliated Approved Originators.” Count
III applies only to AAMBG and alleges that AAMBG violated
Section 8 of RESPA by accepting excessive reinsurance
premiums from Triad, which constituted an illegal kickback
because the premiums received exceeded the value of the
reinsurance provided. Count IV seeks unjust enrichment
against both, apparently as an alternative to the breach of
contract counts.

The
Defendants have filed Motions to Dismiss all counts. BOA
seeks dismissal of itself from the entire lawsuit contending
that it is not a successor to any of the Approved
Originators. BOA, in the alternative, joins with AAMBG in
seeking dismissal of Counts I and II on multiple grounds.
First, they claim that the Complaint alleges that the
contract between Triad and AAMBG is illegal under RESPA and
as such Plaintiffs cannot sue on an illegal contract. Second,
AAMBG asserts that Count I does not state the source giving
rise to any alleged duty it owed to Triad to provide
information to the borrowers. Third, they assert that the
Complaint fails to allege any damages to Triad resulting from
the alleged failure to provide information to the borrowers
regarding the amount of the reinsurance premium. With respect
to Count II, they assert that the agreement does not address
or restrict the referral of borrowers to Triad nor obligate
Triad to insure any potential borrower so referred. Moreover,
they assert that Count II does not make economic sense and as
a consequence is implausible. AAMBG asserts that Count III,
RESPA violation, is time-barred. It also asserts that
government regulations specifically allow for captive
reinsurance arrangements, such as existed between itself and
the approved originators, provided there is a legally binding
reinsurance contract, the reinsurer complies with capital and
reserve requirements of state law, and there is a real
transfer of risk with the likelihood of losses occurring to
the reinsurer. It asserts that the Complaint fails to allege
any facts to show that AAMBG failed to meet any of these
RESPA requirements and, for this reason, Count III is
implausible and falls afoul of Iqbal/Twombly. AAMBG
also points out that Triad certified to HUD, the appropriate
regulatory agency, that its agreement with AAMBG met all
RESPA requirements. Finally with respect to Count IV, AAMBG
asserts that Plaintiffs may not proceed with an unjust
enrichment claim because the complaint alleges that there is
a contract between Triad and AAMBG under which Triad is suing
in Count I. As an alternative, AAMBG asserts that Count IV is
barred by a five-year statute of limitations. (BOA asserts
that Count IV is not directed against it, an assertion to
which Plaintiffs have apparently assented by failing to
respond to this assertion in their responsive brief.)

Plaintiffs
reply with respect to BOA that at least one of the Approved
Originators, Standard Federal, was owned by BOA during some
of the time period set forth in the Amended Complaint and say
that they will amend the Complaint if necessary to allege the
correct ownership connection. With respect to Count I of the
Amended Complaint, Plaintiffs reply that they have adequately
pleaded that AAMBG and BOA had a duty of disclosure to the
borrowers of the cost of the reinsurance premiums and that
they did not comply with this duty. They also reply that the
Complaint alleges that Plaintiffs suffered damages and that
this is sufficient at this stage to get past a motion to
dismiss. They also reply that Count II of the Complaint does
in fact make economic sense and does allege that they
suffered damages. With respect to Count III, the
Rehabilitator replies that she was not appointed until
December 12, 2012, and therefore she could not have been
aware of the RESPA violation, so that Count III does not
violate the five-year statute of limitations. She further
replies that Triad's RESPA certification concerning the
legality of its agreement with AAMBG cannot be imputed to her
and that Plaintiffs adequately allege a RESPA violation. With
respect to Count IV, Plaintiffs assert that they are merely
pleading unjust enrichment as an alternative to Count I as
they are allowed to do. With respect to the statute of
limitations argument, she asserts that, like Count III, she
could not have reasonably known about the breaches of
contract or the unjust enrichment in the time allowed by the
statute of limitations.

II.
DISCUSSION

A.
Count I

With
respect to Count I, Plaintiffs argue that the provisions of
AAMBG's agreement with Triad give AAMBG the right to
notify Triad if a loan is withdrawn at the borrower's
request and give AAMBG the right to add an affiliate to the
Schedule of Approved Providers so long as the affiliate is
shown on AAMBG's holding company disclosure statement,
and that these provisions amount to the acceptance by AAMBG
of the duty to notify the borrowers of the cost of the
reinsurance premiums. However, these contractual provisions
are the only ones mentioned by Plaintiffs in Count I, and
they say nothing which could give rise to a duty requiring
AAMBG to make any disclosures to the borrowers at all.

With
respect to Count I as it applies to BOA, Plaintiffs have
argued that they have provided plenty of information in their
Amended Complaint to put BOA on notice of the nature of the
claim it needs to defend against. The specific allegations
supporting Count I are contained in paragraphs 42 through 45
of the amended complaint. These paragraphs read as follows:

42. Pursuant to the Agreement, each Approved Originator was
to give or cause to be given to each borrower whose loan is
or may be subject to the Agreement a disclosure as
appropriate regulatory authorities may suggest or require.

43. The United States Department of Housing and Urban
Development (“HUD”) is an appropriate regulatory
agency.

44. HUD requires the disclosure of the benefits that they
were receiving including the premiums and other ...

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